Dealing with Erroneous FATCA Inquiries

A foreign bank asks our client to provide information that the bank is not required to provide IRS under FATCA. There are two possibilities. Our client can provide the information or our client can choose not to provide the information. How should we advise our client?

General Ethical Principles

There is often a spectrum of ethical ways to handle any given tax issue. Here are some of the principles used by seasoned and ethical tax lawyers.

Is the client being asked to violate a black letter law that is directed to the client?

Is the client being asked to enter into a conspiracy with a third party whereby the third party will provide less information (or less taxes) than otherwise required of the third party under black letter law?
Is there any downside to the client’s decision, other than legal fees?
What choice will result in the lowest likely fee to the client.
The client ultimately decides.
Analysis

Black Letter Law
The FATCA rules are directed to the bank, not to our client. Therefore, our client is permitted to either honor the bank’s request or not, as the client sees fit – provided that the client is not part of a conspiracy to evade taxes. See immediately below.

Conspiracy with Third Party to Provide Less Information/Taxes
If the client provides the information, the client is providing more information than required under the FATCA law. There is no conspiracy to provide less information. There is no conspiracy for either the client or the bank to pay less United States taxes then otherwise required under United States black letter law. Therefore the client is permitted to honor the bank’s request or not, as the client sees fit.

Any Downside to the Client, Other Than Legal Fees?
When we discuss the advantages and disadvantages of cooperation, we need to address any other downsides – such as loss of privacy. Basically, by cooperating with the bank the client will be giving up privacy. The client has to weigh the loss of privacy against potentially higher legal fees. The issue of legal fees is discussed immediately below.

Minimizing Legal Fees
Experienced tax lawyers are expensive. Deciding whether or not to cooperate with a foreign bank necessarily involves an analysis of whether legal fees will be minimized with cooperation with the foreign bank – or by choosing not to cooperate with the foreign bank. Here is my analysis.

Providing the Requested Information to the Foreign Bank
If we provide the information, our legal fees will consist of:

A brief telephone conference with the client to explain the client’s options. See

Drafting a “waiver” whereby the client acknowledges that he/she is not required to provide the information to the bank but nonetheless authorizes our firm to provide this information.

Having our paralegal copy the Streamlined Procedures documents requested by the bank.

Drafting a transmittal letter.

The cost of all this is, perhaps, $350. If IRS later makes an inquiry regarding our client’s participation in the OVDP, we can easily deal with this inquiry by simply sending the IRS the relevant Streamlined Procedures documents that the client has already filed. Again, the cost is in the neighborhood of $350. Thus, the total cost of cooperation is likely to be about $700.

NOT Providing the Requested Information to the Foreign Bank
If we do not provide the information, it is likely that the bank will place our client on the list of taxpayers who have NOT cooperated with the bank.[1] Ultimately, this noncooperation list may be given to IRS who might make an inquiry of our client. At that point, we will have to provide to IRS the Streamlined Procedures information discussed immediately above. So what is the difference between cooperation and noncooperation with the bank? If the client cooperates, he/she is in the category of bank customers who are cooperating with the bank. If the client does NOT cooperate, the client (erroneously) may be placed in the category of clients who are not cooperating with the bank.[2] It is harder for a taxpayer to resolve matters with IRS once a client finds himself or herself in the “noncooperation” category. In short, our involvement might require more than simply copying a file and drafting a quick transmittal letter. The cost to resolve matters with IRS will likely exceed $1,000.[3]

If we try to get the bank to remove our client from the list of bank customers for whom the bank is required to report to IRS under FATCA, the cost may be several thousand dollars. The bank will insist that we work with their lawyers since the bank is afraid of IRS[4] and will want to be sure that the bank is complying fully with FATCA. The cost of dealing with the bank’s lawyers could amount to several thousand dollars or more.[5]

Conclusion
While the matter is not completely free from doubt, it is likely that cooperation will result in lower legal fees.

The Client Decides
Where there is a spectrum of ethical ways to resolve a situation, our job to provide the advantages or disadvantages of each approach. Then, the client decides. In this case, the client must decide between paying a small legal fee and losing some privacy; or retaining privacy and potentially paying a larger legal fee. Since there are no ethical issues involved, we are free to follow which ever approach the client decides to take.

FOOTNOTES

[1] After all, the bank has already erroneously placed our client on the list of people who are required to provide information to IRS.

[2] See Footnote 1, above.

[3] This fee is NOT compensable. We cannot economically sue a foreign bank over $1,000.

[4] The DOJ has the power to effectively shut down a non-cooperating bank.

[5] Bank attorneys may (or may not) be willing to talk to us. If the bank attorneys are not willing to talk with us, it may take several thousand dollars of our time just to get their attention.